Amended in Assembly June 25, 2015

Amended in Senate April 7, 2015

Senate Bill No. 647

Introduced by Senator Morrell

February 27, 2015

An act to amend Sections 10232.3, 10232.45, and 10238 of the Business and Professions Code, and to amend Section 25102.2 of the Corporations Code, relating to real estate investments.

LEGISLATIVE COUNSEL’S DIGEST

SB 647, as amended, Morrell. Real estate investments: securities: qualification exemption.

(1) Existing law, the Real Estate Law, requires any transaction that involves the sale of, or an offer to sell, a note secured directly by an interest in one or more parcels of real property, or the sale of an undivided interest in a note secured directly by one or more parcels of real property, to comply with specified requirements. Existing law begin delete limits end delete begin insert limits, to end insert the allowable percentage of the current market value of a property, as specified, begin delete to end delete the aggregate principal amount of the note or interest sold. Existing law requires a broker to make reasonable efforts to ensure the offer or sale of notes or interest in notes secured by a lien on real property or a business opportunity meet certain criteria, including, among others, the investment in the notes is suitable and appropriate for the purchaser. To meet this requirement, a broker may obtain a completed investor questionnaire from each person to whom the broker offers or sells the notes and deeds of trust.

This bill would modify the allowable percentage of the current market value that can be sold, as specified. The bill would require the investor questionnaire to be completed within a specific time before the sale, modify the requirement for subsequent questionnaires, and remove the necessity of a broker obtaining an annually updated completed investor questionnaire from each person to whom the broker sold notes and deeds of trust. The bill would update the address of the Real Estate Commissioner on a required notice.

(2) Existing law, the Corporate Securities Law of 1968, provides that it is unlawful to offer or sell any security in this state unless the offer and sale of the security has been qualified with the Commissioner of Business Oversight, or the security or transaction is exempt from qualification. That law also provides that all offers and sales of a security are subject to antifraud provisions, which require information provided to offerees and purchasers to be true and to not omit any material facts necessary to prevent the statements made from being misleading. That law requires an issuer engaged in the business of purchasing, selling, financing, or brokering real estate, that relies on specified transactions exemptions or a securities exemption from qualification for an offering that involves the offer or sale of securities to a person who is not an accredited investor to provide additional information to the Commissioner of Business Oversight regarding the nature of the proposed offering on a form prescribed by the commissioner.

This bill would remove from these requirements to provide additional information to the commissioner, an offering of securities that relies on an exemption for a security that is a promissory note secured by a lien on real property, which is neither one of a series of notes of equal priority secured by interests in the same real property nor a note in which beneficial interests are sold to more than one person or entity.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 10232.3 of the Business and Professions
Code is amended to read:

10232.3.  

(a) Any transaction that involves the sale of or offer
to sell a note secured directly by an interest in one or more parcels
of real property or the sale of an undivided interest in a note secured
directly by one or more parcels of real property shall adhere to all
of the following:

(1) Except as provided in paragraph (2), the aggregate principal
amount of the note or interest sold, together with the unpaid
principal amount of any encumbrances upon the real property
senior thereto, shall not exceed the following percentages of the
current market value of each parcel of the real property, as
determined in writing by the broker or appraiser pursuant to Section
10232.6, plus the amount for which the payment of principal and
interest in excess of the percentage of current market value is
insured for the benefit of the holders of the note or interest by an
insurer admitted to do business in this state by the Insurance
Commissioner:

 

(A)	Single-family residence, owner occupied	80%
(B)	Single-family residence, not owner occupied	75%
(C)	Commercial properties and income-producing properties not begin delete described in (B) or (E) end delete	begin delete 65% end delete
	begin insert described in (B) or (E) end insert	begin insert 65% end insert
(D)	Single-family residentially zoned lot or parcel begin delete which end delete begin insert that end insert has installed offsite improvements including drainage, curbs, gutters, sidewalks, paved roads, and utilities as mandated by the political subdivision having jurisdiction over the lot or parcel	65%
(E)	Land that produces income from crops, timber, or minerals	60%
(F)	Land that is not income producing but has been zoned for (and if required, approved for subdivision as) commercial or residential development	50%
(G)	Other real property	35%

 

(2) The percentage amounts specified in paragraph (1) may be
exceeded when and to the extent that the broker determines that
the encumbrance of the property in excess of these percentages is
reasonable and prudent considering all relevant factors pertaining
to the real property. However, in no event shall the aggregate
principal amount of the note or interest sold, together with the
unpaid principal amount of any encumbrances upon the property
senior thereto, exceed 80 percent of the current fair market value
of improved real property or 50 percent of the current fair market
value of unimproved real property, except in the case of a
single-family zoned lot or parcel as defined in paragraph (1), which
shall not exceed 65 percent of the current fair market value of that
lot or parcel, plus the amount insured as specified in paragraph
(1). A written statement shall be prepared by the broker that sets
forth the material considerations and facts that the broker relies
upon for his or her determination, which shall be retained as a part
of the broker’s record of the transaction. Either a copy of the
statement or the information contained therein shall be included
in the disclosures required pursuant to Section 10232.5.

(3) A copy of the appraisal or the broker’s evaluation, for each
parcel of real property securing the note or interest, shall be
delivered to the purchaser. The broker shall advise the purchaser
of his or her right to receive a copy. For purposes of this paragraph,
“appraisal” means a written estimate of value based upon the
assembling, analyzing, and reconciling of facts and value indicators
for the real property in question. A broker shall not purport to make
an appraisal unless the person so employed is qualified on the basis
of special training, preparation, or experience.

(4) For construction or rehabilitation loans, where the amount
withheld for construction or rehabilitation at the start of the project
exceeds one hundred thousand dollars ($100,000), the term “current
market value” may be deemed to be the value of the completed
project if all of the following safeguards are met:

(A) An independent neutral third-party escrow holder is used
for all deposits and disbursements relating to the construction or
rehabilitation of the secured property.

(B) The loan is fully funded, with the entire loan amount to be
deposited in escrow prior to recording of the deed or deeds of trust.

(C) A comprehensive, detailed draw schedule is used to ensure
proper and timely disbursements to allow for completion of the
project.

(D) The disbursement draws from the escrow account are based
on verification from an independent qualified person who certifies
that the work completed to date meets the related codes and
standards and that the draws were made in accordance with the
construction contract and draw schedule. For purposes of this
subparagraph, “independent qualified person” means a person who
is not an employee, agent, or affiliate of the broker and who is a
licensed architect, general contractor, structural engineer, or active
local government building inspector acting in his or her official
capacity.

(E) An appraisal is completed by a qualified and licensed
appraiser in accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP).

(F) The documentation includes a detailed description of the
actions that may be taken in the event of a failure to complete the
project, whether that failure is due to default, insufficiency of
funds, or other causes.

(G) The entire amount of the loan does not exceed two million
five hundred thousand dollars ($2,500,000).

(5) For construction or rehabilitation loans, where the amount
withheld for construction or rehabilitation at the start of the project
is one hundred thousand dollars ($100,000) or less, the term
“current market value” may be deemed to be the value of the
completed project if all of the following safeguards are met:

(A) The loan is fully funded, with the entire loan amount to be
deposited in escrow prior to recording of the deed or deeds of trust.

(B) A comprehensive, detailed draw schedule is used to ensure
proper and timely disbursements to allow for completion of the
project.

(C) An appraisal is completed by a qualified and licensed
appraiser in accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP).

(D) The documentation includes a detailed description of the
actions that may be taken in the event of a failure to complete the
project, whether that failure is due to default, insufficiency of
funds, or other causes.

(E) The entire amount of the loan does not exceed two million
five hundred thousand dollars ($2,500,000).

(6) If a note or an interest will be secured by more than one
parcel of real property, for the purpose of determining the
maximum amount of the note or interest, each security property
shall be assigned a portion of the note or interest that shall not
exceed the percentage of current market value determined by, and
in accordance with, the provisions of paragraphs (1) and (2).

(b) The note or interest shall not be sold, unless the purchaser
meets one or both of the qualifications of income or net worth set
forth below and signs a statement, which shall be retained by the
broker for four years, conforming to the following:

 

“Transaction Identifier:
Name of Purchaser:			Date:
Check either one of the following, if true:
( ) My investment in the transaction does not exceed 10% of my net worth,
exclusive of home, furnishings, and automobiles.
( ) My investment in the transaction does not exceed 10% of my adjusted
gross income for federal income tax purposes for my last tax year or,
in the alternative, as estimated for the current year.
		Signature”

 

SEC. 2.  

Section 10232.45 of the Business and Professions
Code is amended to read:

10232.45.  

(a) Any broker subject to the provisions of Section
10232.3 or Article 6 (commencing with Section 10237) shall make
reasonable efforts to ensure all of the following with respect to the
offer or sale of notes or interest in notes to be secured by a lien on
real property or a business opportunity:

(1) All persons to whom notes or interests are sold can be
reasonably assumed to have the capacity to understand the
fundamental aspects of the investment, by reason of their
educational, business, or financial experience.

(2) All persons to whom notes or interests are sold can bear the
economic risk of the investment.

(3) The investment in the notes or interests is suitable and
appropriate for the purchaser, given the purchaser’s investment
objectives, portfolio structure, and financial situation.

(b) A broker shall make this determination on the basis of
information he or she obtains from the purchaser. Relevant
information for this purpose includes, at least, the age, investment
objective, investment experience, income, net worth, financial
situation, and other investments of the prospective purchaser, as
well as any other pertinent factors the commissioner shall establish
through regulation.

(c) A broker shall maintain records of the information used to
determine that an investment is suitable and appropriate for each
purchaser and shall retain these records for at least four years.

(d) A broker that complies with all of the following shall be
deemed to have complied with subdivision (a):

(1) Obtains from each person to whom notes and deeds of trust
or interests therein are offered or sold, at least two business days
and not more than one year prior to completing each sale, a
completed investor questionnaire in a form approved by the
commissioner. After obtaining an initial questionnaire, any
subsequent questionnaire from the same person need only reflect
any updates from the immediately preceding questionnaire obtained
by the broker.

(2) Uses the responses in that questionnaire as an aid in
complying with subdivision (a).

(e) Nothing in this section shall be construed to require a broker
to utilize an investor questionnaire to ensure compliance with
subdivision (a). Reliance of a broker on an investor questionnaire
in a form approved by the commissioner shall not prohibit that
broker from utilizing additional information to ensure compliance
with subdivision (a).

SEC. 3.  

Section 10238 of the Business and Professions Code
is amended to read:

10238.  

(a) A notice in the following form and containing the
following information shall be filed with the commissioner within
30 days after the first transaction and within 30 days of any material
change in the information required in the notice:

 

TO:	Real Estate Commissioner Mortgage Loan Section 1651 Exposition Boulevard Sacramento, CA begin delete 95818 end delete begin insert 95815 end insert
This notice is filed pursuant to Sections 10237 and 10238 of the Business and Professions Code.
( ) Original Notice    ( ) Amended Notice
1.	Name of Broker conducting transaction under Section 10237:
2.	Broker license identification number:
3.	List the month the fiscal year ends:
4.	Broker’s telephone number:
5.	Firm name (if different from “1”):
6.	Street address (main location):
	# and Street     City     State     ZIP Code
7.	Mailing address (if different from “6”):
8.	Servicing agent: Identify by name, address, and telephone number the person or entity who will act as the servicing agent in transactions pursuant to Section 10237 (including the undersigned Broker if that is the case):
9.	Total number of multilender notes arranged:
10.	Total number of interests sold to investors on the   multilender’s notes:   ______
11.	Inspection of trust account (before answering this question, review the provisions of paragraph (3) of subdivision (k) of Section 10238).
CHECK ONLY ONE OF THE FOLLOWING:
( )	The undersigned Broker is (or expects to be) required to file reports of inspection of its trust account(s) with the Real Estate Commissioner pursuant to paragraph (3) of subdivision (k) of Section 10238.
Amount of Multilender Payments Collected Last Fiscal Quarter:
Total Number of Investors Due Payments Last Fiscal Quarter:
( )	The undersigned Broker is NOT (or does NOT expect to be) required to file reports of inspection of its trust account(s) with the Real Estate Commissioner pursuant to paragraph (3) of subdivision (k) of Section 10238.
12.	Signature. The contents of this notice are true and correct.
	Date	Type Name of Broker
		Signature of Broker or of Designated Officer of Corporate Broker
		Type Name of Person(s) Signing This Notice

 

NOTE: AN AMENDED NOTICE MUST BE FILED BY THE
BROKER WITHIN 30 DAYS OF ANY MATERIAL CHANGE
IN THE INFORMATION REQUIRED TO BE SET FORTH
HEREIN.

(b) A broker or person who becomes the servicing agent for
notes or begin delete interest end delete begin insert interests end insert sold pursuant to this article, upon which
payments due during any period of three consecutive months in
the aggregate exceed one hundred twenty-five thousand dollars
($125,000) or the number of persons entitled to the payments
exceeds 120, shall file the notice required by subdivision (a) with
the commissioner within 30 days after becoming the servicing
agent.

(c) All advertising employed for transactions under this article
shall show the name of the broker and comply with Section 10235
begin insert of this code end insert and Sections 260.302 and 2848 of Title 10 of the
California Code of Regulations. Brokers and their agents are
cautioned that a reference to a prospective investor that a
transaction is conducted under this article may be deemed
misleading or deceptive if this representation may reasonably be
construed by the investor as an implication of merit or approval
of the transaction.

(d) Each parcel of real property directly securing the notes or
interests shall be located in this state, the note or notes shall not
by their terms be subject to subordination to any subsequently
created deed of trust upon the real property, and the note or notes
shall not be promotional notes secured by liens on separate parcels
of real property in one subdivision or in contiguous subdivisions.
For purposes of this subdivision, a promotional note means a
promissory note secured by a trust deed, executed on unimproved
real property or executed after construction of an improvement of
the property but before the first purchase of the property as so
improved, or executed as a means of financing the first purchase
of the property as so improved, that is subordinate, or by its terms
may become subordinate, to any other trust deed on the property.
However, the term “promotional note” does not include either of
the following:

(1) A note that was executed in excess of three years prior to
being offered for sale.

(2) A note secured by a first trust deed on real property in a
subdivision that evidences a bona fide loan made in connection
with the financing of the usual cost of the development in a
residential, commercial, or industrial building or buildings on the
property under a written agreement providing for the disbursement
of the loan funds as costs are incurred or in relation to the progress
of the work and providing for title insurance begin delete ensuring end delete begin insert insuring end insert the
priority of the security as against mechanic’s and materialmen’s
liens or for the final disbursement of at least 10 percent of the loan
funds after the expiration of the period for the filing of mechanic’s
and materialmen’s liens.

(e) The notes or interests shall be sold by or through a real estate
broker, as principal or agent. At the time the notes or interests are
originally sold or assigned, neither the broker nor an affiliate of
the broker shall have an interest as owner, lessor, or developer of
the property securing the loan, or any contractual right to acquire,
lease, or develop the property securing the loan. This provision
does not prohibit a broker from conducting the following
transactions if, in either case, the disclosure statement furnished
by the broker pursuant to subdivision (l) discloses the interest of
the broker or affiliate in the transaction and the circumstances
under which the broker or affiliate acquired the interest:

(1) A transaction in which the broker or an affiliate of the broker
is acquiring the property pursuant to a foreclosure under, or sale
pursuant to, a deed of trust securing a note for which the broker is
the servicing agent or that the broker sold to the holder or holders.

(2) A transaction in which the broker or an affiliate of the broker
is reselling from inventory property acquired by the broker pursuant
to a foreclosure under, or sale pursuant to, a deed of trust securing
a note for which the broker is the servicing agent or that the broker
sold to the holder or holders.

(f) (1) The notes or interests shall not be sold to more than 10
persons, each of whom meets one or both of the qualifications of
income or net worth set forth below and signs a statement, which
shall be retained by the broker for four years, conforming to the
following:

 

Transaction Identifier:
Name of Purchaser:     Date:  ______
Check either one of the following, if true:
( )	My investment in the transaction does not exceed 10% of my net worth, exclusive of home, furnishings, and automobiles.
( )	My investment in the transaction does not exceed 10% of my adjusted gross income for federal income tax purposes for my last tax year or, in the alternative, as estimated for the current year.
Signature

 

(2) The number of offerees shall not be considered for the
purposes of this section.

(3) Spouses and their dependents, and an individual and his or
her dependents, shall be counted as one person.

(4) A retirement plan, trust, business trust, corporation, or other
entity that is wholly owned by an individual and the individual’s
spouse or the individual’s dependents, or any combination thereof,
shall not be counted separately from the individual, but the
investments of these entities shall be aggregated with those of the
individual for the purposes of the statement required by paragraph
(1). If the investments of any entities are required to be aggregated
under this subdivision, the adjusted gross income or net worth of
these entities may also be aggregated with the net worth, income,
or both, of the individual.

(5) The “institutional investors” enumerated in subdivision (i)
of Section 25102 or subdivision (c) of Section 25104 of the
Corporations Code, or in a rule adopted pursuant thereto, shall not
be counted.

(6) A partnership, limited liability company, corporation, or
other organization that was not specifically formed for the purpose
of purchasing the security offered in reliance upon this exemption
from securities qualification is counted as one person.

(g) The notes or interests of the purchasers shall be identical in
their underlying terms, including the right to direct or require
foreclosure, rights to and rate of interest, and other incidents of
being a lender, and the sale to each purchaser pursuant to this
section shall be upon the same terms, subject to adjustment for the
face or principal amount or percentage interest purchased and for
interest earned or accrued. This subdivision does not preclude
different selling prices for interests to the extent that these
differences are reasonably related to changes in the market value
of the loan occurring between the sales of these interests. The
interest of each purchaser shall be recorded pursuant to
subdivisions (a) to (c), inclusive, of Section 10234.

(h) (1) Except as provided in paragraph (2), the aggregate
principal amount of the notes or interests sold, together with the
unpaid principal amount of any encumbrances upon the real
property senior thereto, shall not exceed the following percentages
of the current market value of each parcel of the real property, as
determined in writing by the broker or appraiser pursuant to Section
10232.6, plus the amount for which the payment of principal and
interest in excess of the percentage of current market value is
insured for the benefit of the holders of the notes or interests by
an insurer admitted to do business in this state by the Insurance
Commissioner:

 

(A)	Single-family residence, owner occupied	80%
(B)	Single-family residence, not owner occupied	75%
(C)	Commercial properties and income-producing properties begin insert not described in (B) or (E) end insert	65%
(D)	Single-family residentially zoned lot or parcel begin delete not described in (B) or (E) which end delete begin insert that end insert has installed offsite improvements including drainage, curbs, gutters, sidewalks, paved roads, and utilities as mandated by the political subdivision having jurisdiction over the lot or parcel	65%
(E)	Land that produces income from crops, timber, or minerals	begin insert   end insert 60%
(F)	Land that is not income producing but has been zoned for (and if required, approved for subdivision as) commercial or residential development	50%
(G)	Other real property	35%

 

(2) The percentage amounts specified in paragraph (1) may be
exceeded when and to the extent that the broker determines that
the encumbrance of the property in excess of these percentages is
reasonable and prudent considering all relevant factors pertaining
to the real property. However, in no event shall the aggregate
principal amount of the notes or interests sold, together with the
unpaid principal amount of any encumbrances upon the property
senior thereto, exceed 80 percent of the current fair market value
of improved real property or 50 percent of the current fair market
value of unimproved real property, except in the case of a
single-family zoned lot or parcel as defined in paragraph (1), which
shall not exceed 65 percent of the current fair market value of that
lot or parcel, plus the amount insured as specified in paragraph
(1). A written statement shall be prepared by the broker that sets
forth the material considerations and facts that the broker relies
upon for his or her determination, which shall be retained as a part
of the broker’s record of the transaction. Either a copy of the
statement or the information contained therein shall be included
in the disclosures required pursuant to subdivision (l).

(3) A copy of the appraisal or the broker’s evaluation, for each
parcel of real property securing the notes or interests, shall be
delivered to each purchaser. The broker shall advise purchasers
of their right to receive a copy. For purposes of this paragraph,
“appraisal” means a written estimate of value based upon the
assembling, analyzing, and reconciling of facts and value indicators
for the real property in question. A broker shall not purport to make
an appraisal unless the person so employed is qualified on the basis
of special training, preparation, or experience.

(4) For construction or rehabilitation loans, the term “current
market value” may be deemed to be the value of the completed
project if the following safeguards are met:

(A) An independent neutral third-party escrow holder is used
for all deposits and disbursements.

(B) The loan is fully funded, with the entire loan amount to be
deposited in escrow prior to recording of the deed or deeds of trust.

(C) A comprehensive, detailed draw schedule is used to ensure
proper and timely disbursements to allow for completion of the
project.

(D) The disbursement draws from the escrow account are based
on verification from an independent qualified person who certifies
that the work completed to date meets the related codes and
standards and that the draws were made in accordance with the
construction contract and draw schedule. For purposes of this
subparagraph, “independent qualified person” means a person who
is not an employee, agent, or affiliate of the broker and who is a
licensed architect, general contractor, structural engineer, or active
local government building inspector acting in his or her official
capacity.

(E) An appraisal is completed by a qualified and licensed
appraiser in accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP).

(F) In addition to the transaction documentation required by
subdivision (i), the documentation shall include a detailed
description of actions that may be taken in the event of a failure
to complete the project, whether that failure is due to default,
insufficiency of funds, or other causes.

(G) The entire amount of the loan does not exceed two million
five hundred thousand dollars ($2,500,000).

(5) If a note or an interest will be secured by more than one
parcel of real property, for the purpose of determining the
maximum amount of the note or interest, each security property
shall be assigned a portion of the note or interest that shall not
exceed the percentage of current market value determined by, and
in accordance with, the provisions of paragraphs (1) and (2).

(i) The documentation of the transaction shall require that (1)
a default upon any note or interest is a default upon all notes or
interests and (2) the holders of more than 50 percent of the recorded
beneficial interests of the notes or interests may govern the actions
to be taken on behalf of all holders in accordance with Section
2941.9 of the Civil Code in the event of default or foreclosure for
matters that require direction or approval of the holders, including
designation of the broker, servicing agent, or other person acting
on their behalf, and the sale, encumbrance, or lease of real property
owned by the holders resulting from foreclosure or receipt of a
deed in lieu of foreclosure. The terms called for by this subdivision
may be included in the deed of trust, in the assignment of interests,
or in any other documentation as is necessary or appropriate to
make them binding on the parties.

(j) (1) The broker shall not accept any purchase or loan funds
or other consideration from a prospective lender or purchaser, or
directly or indirectly cause the funds or other consideration to be
deposited in an escrow or trust account, except as to a specific loan
or note secured by a deed of trust that the broker owns, is
authorized to negotiate, or is unconditionally obligated to buy.

(2) All funds received by the broker from the purchasers or
lenders shall be handled in accordance with Section 10145 for
disbursement to the persons thereto entitled upon recordation of
the interests of the purchasers or lenders in the note and deed of
trust. No provision of this article shall be construed as modifying
or superseding applicable law regulating the escrow holder in any
transaction or the handling of the escrow account.

(3) The books and records of the broker or servicing agent, or
both, shall be maintained in a manner that readily identifies
transactions under this article and the receipt and disbursement of
funds in connection with these transactions.

(4) If required by paragraph (3) of subdivision (k), the review
by the independent certified public accountant shall include a
sample of transactions, as reflected in the records of the trust
account required pursuant to paragraph (1) of subdivision (k), and
the bank statements and supporting documents. These documents
shall be reviewed for compliance with this article with respect to
the handling and distribution of funds. The sample shall be selected
at random by the accountant from all these transactions and shall
consist of the following: (A) three sales made or 5 percent of the
sales made pursuant to this article during the period for which the
examination is conducted, whichever is greater, and (B) 10
payments processed or 2 percent of payments processed under this
article during the period for which the examination is conducted,
whichever is greater.

(5) For the purposes of this subdivision, the transaction that
constitutes a “sale” is the series of transactions by which a series
of notes of a maker, or the interests in the note of a maker, are sold
or issued to their various purchasers under this article, including
all receipts and disbursements in that process of funds received
from the purchasers or lenders. The transaction that constitutes a
“payment,” for the purposes of this subdivision, is the receipt of
a payment from the person obligated on the note or from some
other person on behalf of the person so obligated, including the
broker or servicing agent, and the distribution of that payment to
the persons entitled thereto. If a payment involves an advance paid
by the broker or servicing agent as the result of a dishonored check,
the inspection shall identify the source of funds from which the
payment was made or, in the alternative, the steps that are
reasonably necessary to determine that there was not a
disbursement of trust funds. The accountant shall inspect for
compliance with the following specific provisions of this section:
paragraphs (1), (2), and (3) of subdivision (j) and paragraphs (1)
and (2) of subdivision (k).

(6) Within 30 days of the close of the period for which the report
is made, or within any additional time as the commissioner may
in writing allow in a particular case, the accountant shall forward
to the broker or servicing agent, as the case may be, and to the
commissioner, the report of the accountant, stating that the
inspection was performed in accordance with this section, listing
the sales and the payments examined, specifying the nature of the
deficiencies, if any, noted by the accountant with respect to each
sale or payment, together with any further information as the
accountant may wish to include, such as corrective steps taken
with respect to any deficiency so noted, or stating that no
deficiencies were observed. If the broker meets the threshold
criteria of Section 10232, the report of the accountant shall be
submitted as part of the quarterly reports required under Section
10232.25.

(k) The notes or interests shall be sold subject to a written
agreement that obligates a licensed real estate broker, or a person
exempted from the licensing requirement for real estate brokers
under this chapter, to act as agent for the purchasers or lenders to
service the note or notes and deed of trust, including the receipt
and transmission of payments and the institution of foreclosure
proceedings in the event of a default. A copy of this servicing
agreement shall be delivered to each purchaser. The broker shall
offer to the lenders or purchasers the services of the broker or one
or more affiliates of the broker, or both, as servicing agent for each
transaction conducted pursuant to this article. The agreement shall
require all of the following:

(1) (A) That payments received on the note or notes be
deposited immediately to a trust account maintained in accordance
with this section and with the provisions for trust accounts of
licensed real estate brokers contained in Section 10145 and Article
15 (commencing with Section 2830.1) of Chapter 6 of Title 10 of
the California Code of Regulations.

(B) That payments deposited pursuant to subparagraph (A) shall
not be commingled with the assets of the servicing agent or used
for any transaction other than the transaction for which the funds
are received.

(2) That payments received on the note or notes shall be
transmitted to the purchasers or lenders pro rata according to their
respective interests within 25 days after receipt thereof by the
agent. If the source for the payment is not the maker of the note,
the agent shall inform the purchasers or lenders in writing of the
source for payment. A broker or servicing agent who transmits to
the purchaser or lenders the broker’s or servicing agent’s own
funds to cover payments due from the borrower but unpaid as a
result of a dishonored check may recover the amount of the
advances from the trust fund when the past due payment is
received. However, this article does not authorize the broker,
servicing agent, or any other person to issue, or to engage in any
practice constituting, any guarantee or to engage in the practice of
advancing payments on behalf of the borrower.

(3) If the broker or person who is or becomes the servicing agent
for notes or interests sold pursuant to this article upon which the
payments due during any period of three consecutive months in
the aggregate exceed one hundred twenty-five thousand dollars
($125,000) or the number of persons entitled to the payments
exceeds 120, the trust account or accounts of that broker or affiliate
shall be inspected by an independent certified public accountant
at no less than three-month intervals during the time the volume
is maintained. Within 30 days after the close of the period for
which the review is made, the report of the accountant shall be
forwarded as provided in paragraph (6) of subdivision (j). If the
broker is required to file an annual report pursuant to subdivision
(o) or pursuant to Section 10232.2, the quarterly report pursuant
to this subdivision need not be filed for the last quarter of the year
for which the annual report is made. For the purposes of this
subdivision, an affiliate of a broker is any person controlled by,
controlling, or under common control with the broker.

(4) Unless the servicing agent will receive notice pursuant to
Section 2924b of the Civil Code, the servicing agent shall file a
written request for notice of default upon any prior encumbrances
and promptly notify the purchasers or lenders of any default on
the prior encumbrances or on the note or notes subject to the
servicing agreement.

(5) The servicing agent shall promptly forward copies of the
following to each purchaser or lender:

(A) Any notice of trustee sale filed on behalf of the purchasers
or lenders.

(B) Any request for reconveyance of the deed of trust received
on behalf of the purchasers or lenders.

(l) The broker shall disclose in writing to each purchaser or
lender the material facts concerning the transaction on a disclosure
form adopted or approved by the commissioner pursuant to Section
10232.5, subject to the following:

(1) The disclosure form shall include a description of the terms
upon which the note and deed of trust are being sold, including
the terms of the undivided interests being offered therein, including
the following:

(A) In the case of the sale of an existing note:

(i) The aggregate sale price of the note.

(ii) The percent of the premium over or discount from the
principal balance plus accrued but unpaid interest.

(iii) The effective rate of return to the purchasers if the note is
paid according to its terms.

(iv) The name and address of the escrow holder for the
transaction.

(v) A description of, and the estimated amount of, each cost
payable by the seller in connection with the sale and a description
of, and the estimated amount of, each cost payable by the
purchasers in connection with the sale.

(B) In the case of the origination of a note:

(i) The name and address of the escrow holder for the
transaction.

(ii) The anticipated closing date.

(iii) A description of, and the estimated amount of, each cost
payable by the borrower in connection with the loan and a
description of, and the estimated amount of, each cost payable by
the lenders in connection with the loan.

(C) In the case of a transaction involving a note or interest
secured by more than one parcel of real property, in addition to
the requirements of subparagraphs (A) and (B):

(i) The address, description, and estimated fair market value of
each property securing the loan.

(ii) The amount of the available equity in each property securing
the loan after the loan amount to be apportioned to each property
is assigned.

(iii) The loan to value percentage for each property after the
loan amount to be apportioned to each property is assigned pursuant
to subdivision (h).

(2) A copy of the written statement or information contained
therein, as required by paragraph (2) of subdivision (h), shall be
included in the disclosure form.

(3) Any interest of the broker or affiliate in the transaction, as
described in subdivision (e), shall be included with the disclosure
form.

(4) When the particular circumstances of a transaction make
information not specified in the disclosure form material or
essential to keep the information provided in the form from being
misleading, and the other information is known to the broker, the
other information shall also be provided by the broker.

(5) If more than one parcel of real property secures the notes or
interests, the disclosure form shall also fully disclose any risks to
investors associated with securing the notes or interests with
multiple parcels of real property.

(m) The broker or servicing agent shall furnish any purchaser
of a note or interest, upon request, with the names and addresses
of the purchasers of the other notes or interests in the loan.

(n) No agreement in connection with a transaction covered by
this article shall grant to the real estate broker, the servicing agent,
or any affiliate of the broker or agent the option or election to
acquire the interests of the purchasers or lenders or to acquire the
real property securing the interests. This subdivision shall not
prohibit the broker or affiliate from acquiring the interests, with
the consent of the purchasers or lenders whose interests are being
purchased, or the property, with the written consent of the
purchasers or lenders, if the consent is given at the time of the
acquisition.

(o) Each broker who conducts transactions under this article,
or broker or person who becomes the servicing agent for notes or
interests sold pursuant to this article, who meets the criteria of
paragraph (3) of subdivision (k) shall file with the commissioner
an annual report of a review of its trust account. The report shall
be prepared and filed in accordance with subdivision (a) of Section
10232.2 and the rules and procedures thereunder of the
commissioner. That report shall cover the broker’s transactions
under this article and, if the broker also meets the threshold criteria
set forth in Section 10232, the broker’s transactions subject to that
section shall be included as well.

(p) Each broker conducting transactions pursuant to this article,
or broker or person who becomes the servicing agent for notes or
interests sold pursuant to this article, who meets the criteria of
paragraph (3) of subdivision (k) shall file with the commissioner
a report of the transactions that is prepared in accordance with
subdivision (c) of Section 10232.2. If the broker also meets the
threshold criteria of Section 10232, the report shall also include
the transactions subject to that section. This report shall be
confidential pursuant to subdivision (f) of Section 10232.2.

SEC. 4.  

Section 25102.2 of the Corporations Code is amended
to read:

25102.2.  

The commissioner shall require any issuer that is
engaged in the business of purchasing, selling, financing, or
brokering real estate, and that relies upon an exemption authorized
by subdivision (e), (f), (h), or (n) of Section 25102, for an offering
which involves the offer or sale of securities to any person who is
not an accredited investor, as defined in Regulation D of the
Securities and Exchange Commission (17 C.F.R. 230.501 et seq.),
in a transaction that is not registered pursuant to the Securities Act
of 1933, to provide additional information regarding the nature of
the proposed offering on a form prescribed by the commissioner.
This information shall include the names of the issuer’s officers
and directors in the case of a corporation, managers in the case of
a manager-managed limited liability company, members in the
case of a member-managed limited liability company, general
partner in the case of a limited partnership, or persons performing
similar functions in the case of other types of issuers, the offering
disclosure documents provided to prospective purchasers, a list of
all state and federal licenses required to further the purposes of
the investment, and the names of all licensed persons that will
undertake those activities.